Lawyers Reflect on the First Six Months of the New Bankruptcy Abuse and Prevention Act
Q: What is the new 2005 bankruptcy abuse and consumer protection statute, and when did it take effect?
A: The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a major reform of the bankruptcy system, was passed by Congress and signed into law by President Bush in April 2005. Under this law, the bankruptcy process was reformed and updated in a number of ways. One of the most notable changes was the imposition of tighter eligibility requirements for filers. The majority of changes created by this bankruptcy abuse prevention law took effect on October 17, 2005( 180 days after the law was signed ), although a few changes took effect immediately after the legislation was signed by the President.
Q: Do the new bankruptcy statute changes make it more difficult to file for consumers to file insolvency under Chapter 7 ?
A: As of October 17, 2005 bankruptcy applicants who wish to file under Chapter 7 must meet certain eligibility requirements under a “means test .”
Under the “means test ,” if your current monthly income is less than the median income in your state, you are able to file for bankruptcy under Chapter 7. But if your current monthly income is above the median income in your state, and you can afford to pay $100 per month toward your debt, you cannot file under Chapter 7 and must proceed under Chapter 13. Whether you can afford to pay $ 100 per month( or $6,000 over a five-year period) is based on a formula that includes your monthly income, your expenses, and the total amount of your debt.
Q: I want to file for bankruptcy, but I have not paid taxes for the past few years. Can I still file ?
A: Since the new law went into effect on October 17, 2005, people wishing to file bankruptcy under Chapter 7 or Chapter 13 must now show proof of their income by providing federal tax returns from the last tax year. If a bankruptcy filer has not paid taxes for the previous tax year, he or she must do so, or file a declaration of non-filing before the bankruptcy can proceed.
Q: Is it true that people who want to file for bankruptcy now need to go through some type of credit counseling ?
A: Yes. Before filing for bankruptcy most applicants must now undergo credit counseling in a government-approved program, and must file their certificate of completion concurrent with their bankruptcy petition. Also, after the conclusion of bankruptcy proceedings, but before any debt can be discharged, bankrupt debtors must participate in a government-approved financial management education program and file a course completion certificate with the Court.
Q: If I file for bankruptcy, can my landlord still evict me from my apartment ?
A: People who file for bankruptcy are entitled to certain immediate protections from certain legal actions — part of what is called the “automatic stay ” effect of a chapter 7 bankruptcy filing, because many potential legal actions against the filer are stopped( known as “stayed ” in legal terms ). But after the 2005 bankruptcy laws took effect, some of these protections were eliminated. One key change is that filing for bankruptcy no longer stops eviction actions.
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There are a number of major players in bankruptcy cases. The filing company is called the debtor, and those owed money are called creditors. There are many classes of creditors: secured (those who get paid off first, such as banks), priority (such as employees and taxing authorities) and unsecured (suppliers).
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Then there are those who preside over the case, including a ruling judge, the U.S. Trustee (part of the Department of Justice) who makes sure the proceedings keep moving along–and a trustee that takes over the liquidation of the business (Chapter 7 trustees are not government employees but private parties who are part of the “panel” of trustees).
As soon as a company files for Chapter 7, it stops operating. The owner hands over the keys to the Chapter 7 trustee who operates the business in a limited fashion, mainly to prepare it for an orderly liquidation.
The majority of Chapter 7 cases are known as “no asset” cases–meaning that unsecured creditors get zilch. To the extent that there are assets, the liens of the secured creditors are greater than the value of the assets. (In any case, the Chapter 7 trustee must make an independent investigation to determine if, indeed, there is something left for unsecured creditors.)
The case begins when the debtor files a petition (a two page fill in the blank form) and a list of all creditors. As soon as the petition is filed, all assets of the company become “property of the estate.” If the company is filing under Chapter 7, the Office of the U.S. Trustee appoints the Chapter 7 trustee.
In addition to distributing assets to creditors, the trustee also looks for potential lawsuits. For example, if the principal owner tried to hide valuable assets by transferring them to a third party, the trustee can sue to bring those assets back into the estate.
Within 15 days of the filing of the petition, the debtor must file the Schedules and Statement of Financial Affairs. The Schedules are basically a snapshot of the debtors balance sheet as of the petition date. The Statement of Financial Affairs looks at the debtor’s historical operations and also covers amounts paid to company insiders over the previous year.
Next, the Chapter 7 trustee interviews the principal under oath. This is called the Section 341 First Meeting of Creditors (named after section 341 of the Bankruptcy Code). This interview takes place at the Office of the U.S. Trustee–not in court. Anyone can attend, and creditors of the debtor are permitted to ask questions.
Assuming the investigation fails to reveal any improprieties, within a short period of time (generally a few months), a final report is filed and the case is complete.